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Analyst coverage and the quality of corporate investment decisions

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  • To, Thomas Y.
  • Navone, Marco
  • Wu, Eliza

Abstract

In this paper, we examine the effect of financial analysts on the quality of corporate investment decisions. We show that greater analyst coverage leads to higher total factor productivity within firms, a finding that is robust after using both an instrumental variable approach and an experimental design that exploits exogenous reductions in analyst coverage due to broker mergers and closures. We further identify that the positive effect of analysts on firm-level productivity emanates from their critical role in information distribution and external monitoring within more opaque and financially constrained firms and also firms with weaker investor protection.

Suggested Citation

  • To, Thomas Y. & Navone, Marco & Wu, Eliza, 2018. "Analyst coverage and the quality of corporate investment decisions," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 164-181.
    • Handle: RePEc:eee:corfin:v:51:y:2018:i:c:p:164-181
    DOI: 10.1016/j.jcorpfin.2018.06.001
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    More about this item

    Keywords

    Equity analysts; Productivity; Information asymmetry; Corporate governance; External finance; Corporate investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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